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Iowa Employee Stock Ownership Plan

A community can benefit greatly if a business is sold to existing employees rather than to an out-of-state buyer that could shift jobs and profits elsewhere. Employee stock ownership plans (ESOP) are a useful tool that allows departing owners to share the business equity with existing employees. ESOPs are commonly used to create a market for the shares of departing owners of successful companies and to reward the employees of the company.

How an ESOP Works

To set up an ESOP, a company will create a trust fund, into which either new shares of its own stock or cash to buy existing stock will be contributed and stored. Any contributions made to this fund are tax-deductible, which makes this plan attractive to many companies.

Once the company accumulates new shares, or uses its cash contributions to buy back existing shares, the shares are allocated to individual employee accounts. The allocations are commonly made on the basis of relative pay, although other nondiscriminatory methods can be used as well. The employees will gain an increasing right to the shares in their account as long as they continue to work at the company, also known as vesting.

When employees leave the company, they receive however much stock they have vested. These shares must be bought back by the company at their fair market value. These shares give employees the right to vote on all issues within public companies, and the major issues within private companies.